The trading scandal raises further questions about the validity of UBS’s investment bank and whether an integrated model works for the Swiss group. Experts say they should concentrate on wealth management.
UBS group chairman Kaspar Villiger says: “The investment bank will continue to strengthen its alignment with UBS's wealth management businesses, in addition to serving its corporate, sovereign and other institutional clients.”
Bruce Weatherill, founder of industry consultant Weatherill Executive Consulting, who has been working in the wealth management industry for 30 years, argues that this desire for an integrated one-bank model is misplaced.
“Only very rarely in my interaction with clients do they tell me that it is necessary for their wealth manager to have an investment bank,” he says. “The main reason they choose a wealth manager is based on the financial strength of the organization and this has been threatened over the last few years by having an investment bank as part of such groups.”
He adds that the concept of a wealth manager not being able to survive financially without an investment banking arm is also a fallacy from the viewpoint of clients. “Does UBS need the investment bank to subsidize the wealth management operations? If that is the case, then one has to think they are not charging enough for wealth management. If you have a good proposition in wealth management it pays for itself.”
Operating profit from wealth management (including the Swiss bank) at UBS dwarfs that of investment banking – in the first two quarters of this year it was almost twice as much as investment banking. But wealth management profits have been dropping. Full-year 2010 operating profits from wealth management including the Swiss retail bank were SFr4 billion ($4.4 billion) compared with SFr6 billion for 2008.
The former head of a European private bank says that UBS has to keep its investment banking if it wants to stay ahead in wealth management. “Private banks have to offer some investment banking capabilities if they want to appeal to ultra-high-net-worth clients,” he says. “If not, those clients will simply go elsewhere.
“What UBS needs to do is understand that the investment bank is there to service their main business – wealth management. It really needs to reorganize and structure it so the investment bank is there integrated with, but ultimately reporting to, the wealth management business.”
He argues that most investment banking lines are superfluous for private banking clients. “You don’t need M&A or corporate advisory, and these days there is no longer a need to be able to arrange IPOs for clients,” he says. “If you’re just executing bonds at wholesale prices, that is pointless too.”
He says the value lies in being able to offer value-added, high-margin structured products. “So, yes, they need to keep some of it,” he says. “I’ve no idea why they were still in proprietary trading, however.”